For example, an American oil company could buy the rights to an Indonesian forest, thus creating a so-called carbon sink, to offset against its polluting activities elsewhere.

However it is unlikely the scheme could get off the ground without the Kyoto Protocol in place to set and enforce the rules.

With the United States, like Australia, opposed to ratification, the protocol's fate rests with the unpredictable Russia.

Although Australia opposed Kyoto, it had four officers in the AGO working on emissions trading.

A spokesman for environment minnister Dr David Kemp said the government, through its emission abatement programs, was on track to meet the Kyoto target of 108 per cent of 1990 emissions averaged over the period between 2008 and 2111.

He said the government was thinking beyond Kyoto and would announce this year a new climate change strategy -- designed to maintain production while cutting greenhouse emissions.

However, labor's environment spokesman Kelvin Thompson said the decision showed the government had lost interest in tackling emissions.

"Hardly a day goes by without new evidence emerging of the threat climate change poses for Australia -- droughts, floods, bushfires, storms, wildlife extinction," he said.

Mr Thompson said that while the government fiddled, the European Union was working on a trading scheme, which expert advice said could create a $600 billion market.

"In 1999 the prime minister's own Science, Engineering and Innovation Council identified a $750 billion market and recommended aggressive action to ensure Australian companies were able to participate in it," he said.

"David Kemp acknowledges scientific warnings that the world has to reduce carbon emissions by more than 50 per cent this century and that will not be achieved without a trading scheme while polluting technology is phased out," Senator Brown said.

NSW Premier Bob Carr said the decision was scandalous and disgraceful.

"We've got an opportunity to benefit from emissions trading and the federal government's pulling out of this," Mr Carr said.

"Whether they sign up to Kyoto or they don't, there is a case for emissions trading."

Acting Victorian Premier John Thwaites said Australia was being left behind while Japan, New Zealand and the EU were preparing for the impacts of climate change.

"Emissions trading is not just an environmental policy, it is the microeconomic reform we will need to compete in a carbon-constrained future," he said.

"The federal government, and particularly the prime minister, insist they're serious about dealing with climate change, yet actions such as pulling out of international climate agreements and trading discussions prove they don't care at all," she said.